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The airline industry surprised analysts with stronger-than-expected December results, led by

Continental Airlines

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Analysts expected December results to come in slightly weaker or in line with December 2002 results, because the entire Thanksgiving travel weekend fell in November this year. But many airlines, especially the major carriers, bucked expectations and showed increases to load factor, or the percentage of seats filled on every flight.

Continental was an especially big surprise, announcing that traffic, or revenue passenger miles, jumped 7.6% from last year, while capacity, or the number of available seat miles, rose 3.3%. With more people paying for fewer seats, planes held more passengers than they did a year ago, with load factor coming in at 77%, up from 73.9% a year ago.

"Given how Continental's operations were negatively impacted by snowstorms over two weekends in December, we are quite pleased by these results," said Michael Linenberg, analyst at Merrill Lynch. "Actually it appears that Continental may have achieved break even for the month."

In addition to traffic, capacity and load factors, Continental also announced passenger revenue per available seat mile, or PRASM, which is a critical metric that tracks how much money airlines generate per paying customer. Continental said that PRASM was up 0.5% to 1.5% over last year and would have been up even more had the Sunday after Thanksgiving, a busy travel day, fallen in December as it had last year.

While Continental and other airlines showed strength in the number of paying customers flown, pricing power remains weak and could be cause for concern as airlines begin adding back flights and filling out their route structures.

As J.P. Morgan analyst Jamie Baker noted, Continental's yield, a measure of the revenue generated per passenger, fell 3.1% in December, marking the fourth straight month of year-over-year yield declines. In fact, the trend is getting worse, with yields off 1.1% in September, followed by a drop of 2.1% in October and a 2.2% fall in November.

"While we remain cautiously optimistic that seasonal resetting of corporate travel budgets may reverse this trend in coming months, any evidence of pricing power remains nonexistent, in our opinion," said Baker.

Nonetheless, Continental's results could bode well for the rest of the industry, with Linenberg estimating that industry PRASM could be up 3% to 4% annually this December. With renewed terror fears weighing on airline stocks, Continental's results lifted the entire sector, boosting the Amex Airline Index 0.8%.

Outside Continental

Other network carriers posted strong results, but none matched Continental's improvement to traffic or load factor.

American Airlines, the world's largest carrier and unit of


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, announced that traffic fell 0.1% over last December, but capacity fell 0.8%, helping raise load factors to 73.7%, up from 73.2% a year ago. Still, analysts were concerned that supply could outstrip demand if American and other airlines add back capacity too fast.

"Although we believe AMR is likely to be one of the survivors in this cycle and that 2005 earnings potential is not priced in, the near-term outlook for the stock remains difficult given the lack of conviction in the market about the pace of a

revenue recovery given industry

capacity growth this year," said David Strine, analyst at Bear Stearns, who said the stock would remain range-bound in the near term.

Of the network names,

Delta Air Lines

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was weakest, showing a 0.5% drop in traffic against a 0.3% fall in capacity, which lowered load factor to 74.1% from 74.3%.

America West Airlines


, which is a network airline operating as a low-cost carrier, announced that traffic rose 5.3%, while capacity increased 4.8%, boosting load factor to 74.6% from 74.2%.

Other low-cost carriers also expanded capacity in December, continuing their attempt to steal market share away from the network carriers, but did so largely at the expense of load factors, filling fewer seats.

Southwest Airlines

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, the nation's largest low-cost carrier, announced that traffic gained 1.1% in December against a 4.3% rise in capacity, which means the carrier filled 64% of seats, off from 66% from last year.



, which battles Delta in Atlanta, announced a 20% traffic increase against a 20.1% capacity increase, marginally lowering its load factor for the month.

Regional carriers continued their rapid expansion in December, with most names showing major increases to both capacity and traffic as large partner airlines use the smaller players to fill out their route structures.

Mesa Airlines

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posted the gaudiest numbers, announcing that traffic increased 71.1% over last year against a 56.1% capacity increase, boosting load factor to 69.6%.



said traffic rose 44.5% against a 38.3% capacity increase, boosting load factor to 70.6%, while

Alaska Airlines

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said traffic rose 8% against an 8.5% capacity increase, dropping load factor to 72.9%.

Continental's results lifted the entire sector, boosting the Amex Airline Index 4.1%.



rose 90 cents, or 7.3%, to $13.25; Delta rose 82 cents, or 6.9%, to $12.70, while Continental rose 89 cents, or 5.4%, to $17.41.